4 last-ditch, high-cost loans to avoid

Don't make last year's spending mistakes worse with these high-cost loans

If
you're coming out of a holiday daze to find that it has left you severely short on
cash, a short-term loan to tide you over for a little while may seem like manna from heaven. However,
you could end this year in worse shape than you started as some high-cost,
short-term loans are bad deals all year around.

There's
no shortage of lenders advertising loan products to help you get over the high-holiday-bill
blues by allowing you to continue to borrow. For example, PaydayLoansOnline.net, an online marketplace for payday
lenders, announced its "New Year Resolution Loan Finder," while another, PersonalLoansForBadCredit.net, suggests that a
short-term loan could help you get your finances in order in 2013.

But
while a short-term loan can get you out of a bad fix, certain types of loans can
leave you in a bigger hole.

Loans to avoid1. At the
top of the list of loans to steer clear of are payday loans, in which you get an advance on your next paycheck and
the lender gets his money back -- along with fees and interest -- when your
paycheck arrives.

Payday
loans, however, are notorious for their extraordinarily high interest
rates. According to the Center for
Responsible Lending (CRL), the average payday loan charges between a 391 percent
and 521 percent interest rate. Not only
that, but once the payday lender is paid, consumers typically don't have enough
money left over to pay other bills, so they take out another loan or refinance
or rollover the current payday loan -- and accrue even more fees and interest.

"People's
situations can spiral downward very quickly," says Deanna Booker, a spokeswoman
for Consumer Credit Counseling Services of Maryland and Delaware. "Payday loans are a debt trap because you always need another one." In fact, the CRL found
that the average payday loan borrower takes out nine loans per year.

While
payday lenders used to be primarily storefront shops, they are increasingly
moving online, says Tom Feltner, director of financial services for the
Consumer Federation of America (CFA). Not only are payday lenders offering virtual
loans, but some sites claim to take your information, sift through multiple
payday lenders and find the "best loan" for you. However, in many
cases, "what they're really doing
is selling your information to see which payday lender is going to pay the most
to get your business," Feltner adds.

2. Another
loan to avoid is the car title loan,
which is similar in structure to payday loans, but throws in an additional
requirement of borrowers: In return for a short-term loan, you must turn over
the title of your car so the lender can take possession of it if you don't pay up
on time. The interest rates charged on car title loans tend to be 20 to 30
times more than the typical rates charged by credit card issuers, according to
the CRL. Since most people can't pay the entire loan back when it's due, the
average car title borrower renews the loan eight times, the CRL found.

3. With tax time comes tax refunds, and if you're in a hurry to pay off bills, it's easy to fall for an offer to expedite that refund. In years past, tax preparation firms were eager to oblige you with high-fee refund anticipation loans. They'd loan you the amount you expected on your tax return, minus a hefty fee that translated into an annualized interest rate of 1,000 percent or more. After seeing large-scale abuse, the Internal Revenue Service stopped providing information to lenders that facilitated the loans. No data, plus bad publicity, made banks rethink the product, and 2012 was the last year they were available from federally regulated banks. In their place, however, new come-ons for "refund anticipation checks" have sprung up. They are deposit products, not loans, but guess what they share with their closely named predecessor? You got it. Big fees. Don't fall for them. With quick, electronic deposits available from Uncle Sam, "refund anticipation" has become a short-lived malady anyway.

People's
situations can spiral downward very quickly. Payday loans
are a debt trap because you always need another one.

4. Some big
banks and credit unions are offering short-term
loans with terms that are comparable to payday loans, says Kathleen Day, a
spokeswoman for the CRL. In many cases, the bank will deposit the money into
your checking account and then automatically deduct the loan amount plus fees
when you receive your paycheck. According to the Center for Responsible
Lending, the average APR on such loans is 365 percent. Earlier this month, Sen.
Richard Blumenthal (D-Conn.) sent
a letter to Federal Reserve Chairman Ben S. Bernanke, Federal Deposit
Insurance Corporation Chairman Martin Gruenberg and Comptroller of the Currency
Thomas J. Curry, asking for action to stop banks from these payday lending
practices. According to Blumenthal's letter, the average borrowers of these short-term
bank loans find themselves renewing the loan at least 16 times over a year's
time.

Signs of a bad loan
If you
have to borrow money, make sure the loan is one that you will realistically be
able to repay, says Todd Mark, vice president of education for Consumer Credit
Counseling Services of Greater Dallas. In most cases, the two weeks until your
next paycheck is not enough time.

You want
to avoid:

Lenders
who do not check your credit and income to make sure you can actually afford
the loan.

Lenders
who automatically deduct funds from your checking account.

Loans
that have a high double digit or three digit annual percent rate. (Note that
these lenders will typically not advertise their APRs.)

The good
news is there are better avenues to explore.

In an
absolute emergency, "people would be better off using a credit card," says Day.
But exercise discipline and avoid adding new charges so you can pay the bill
off within a year, Day adds.

You may also
be able to find a good short-term loan product from a bank, many of which have added affordable new products that carve into the business of payday lenders without gouging consumers. A 2011 survey
conducted by the FDIC found that 20 percent of households that took out payday
loans did so because they didn't think they could get small-dollar loans from a
bank. Yet, the same survey found that eight out of 10 banks offered personal
loans under $2,500 and many of those loans had repayment terms of 90 days or
more with APRs of 36 percent or less.

If you're
considering taking out a loan to make a payment on another loan, talk to your
creditor and explain that you're experiencing a temporary cash crunch and ask
for an extension on the due date rather than picking up a new debt, suggests
Booker.

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